covariance

(noun)

A measure of how much two random variables change together.

Related Terms

  • Risk free rate
  • discounted cash flow

Examples of covariance in the following topics:

  • Making Risk Adjustments

    • The beta coefficient, expressed as a covariance, is the risk of a new project in relation to the risk of the market as a whole.
    • The beta of an investment is equal to the covariance between the rate of return of the investment, r(a), and that of the portfolio, r(p).
  • Measuring and Protecting against Economic Exposure

    • Covariance measures the variation of the asset's price to the exchange rate while the variance shows the variation of the exchange rate.
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